Britain's austerity challenge to Obama

Nick Clegg, George Osborne and David Cameron in the Commons on budget day. Photograph: PA

The New York Times has front-paged the news of the UK government's austerity programme today, right up there with a splashy, above-the-fold photo of a pile of Evening Standards at the newsstand that blare Tax and Axe. I've been meaning to get to this since the weekend, as it raises some fascinating questions and issues that may very well bear more strongly on the "special relationship" than any of Barack Obama's calling BP by its old name.

The Cameron-Osborne plan puts Britain on a fiscal trajectory diametrically the opposite of the one Obama prefers for the US. Obama wants more stimulus spending (whether he'll get it or not is another question). Traditional economics supports the Obama view. The Times story notes that "the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak."

The Cameron plan is thus, however indirectly, a challenge to the president. Americans, especially conservative ones, are not in the habit of pointing to European countries and saying see, we should be like that. But as we've seen in recent years, they are willing to carve out exceptions. Poland, a conservative and religious and anti-communist country, made the good list during the post-9/11 era. And the Britain of austerity made the cut under Maggie, and it will make it now. So Cameron's move will put some pressure on the Obama administration to adopt similar austerity measures. Get used to hearing from the American right: "If even Britain can do it … "

A small stimulus package of $50bn languishes in (where else?) the Senate, as skittish solons ponder the ramifications of incurring one more time the Tea Party movement's wrath. Emergency benefits to unemployed workers expired in early June, and the Senate can't muster 60 votes to renew them, or to pledge money designed to avoid layoffs of teachers.

So we're heading down our own austerity path willy-nilly. The rubber may hit the road by December, when the president's deficit commission is due to report on some recommendations to bring the deficit (now 13% of GDP) down to 3% by 2015. The bipartisan panel has 18 members, and 14 must agree on recommendations. That's not going to be easy. In fact it's going to be close to impossible. But I think, and many liberals think, the panel will certainly recommend cuts to social security and Medicare. Two people who were on Obama's transition team have written a broadside asking: Has Obama created a social security "death panel"?

The problem here in America – our eternal political problem – is over taxes. Republicans will not raise a tax. Of any sort. Period. It's a reasonable educated guess that the panel might try to eke out some language about a value-added tax, which would be a new thing to America and which liberals also tend to loathe. But it's the only tax that Republicans might sign a piece of paper agreeing to, although even then the odds are very long indeed, and it would probably have to be accompanied by a pledge to cut taxes elsewhere.

If you're a Labourite and you're against Cameron's plan, let me tell you that at least you have one thing to be grateful for. You have a Conservative government that understands that revenues are part of the mix. US conservatives would never accede to that, even though their hero Ronald Reagan actually did, in 1982, which helped get the US out of the then-recession. But that has been airbrushed out of the picture.

There aren't the votes in Congress for more stimulus, and there sure won't be after November. So Obama is likely going to be forced into some sort of austerity programme as well next year. Cameron has handed the enforcers some ammunition, and Americans will be watching closely to see if his plan works. The best-case scenario for comity's sake is that some cosmic balance of Obamaism and Cameronism helps us out of the mess. The worst: that traditional economics is right, and Britain kick-starts a double-dip recession and drags the US into it. That bust of Churchill that Obama relegated to storage is probably staying put for a while.